Is the fund missing out on potential gains?

The Secure Asset Fund for Users (SAFU ) — an emergency fund established by crypto exchange Binance to cover user assets — contained various cryptocurrencies, such as Bitcoin (BTC), Tether (USDT), True USD (TUSD) and BNB (BNB).

But on April 18, 2024, Binance denominated the entire fund — 100% of SAFU assets — in Circle’s USD Coin (USDC).

The timing of this decision may seem odd, with the Bitcoin bull market in full swing, driven by the recent halving and high Bitcoin exchange-traded fund (ETF) volumes.

In the conversion, Binance exchanged 1.36 million BNB, 16,277 BTC and its holdings from USDT and TUSD to USDC.

With 100% of SAFU now essentially pegged to the U.S. dollar through a government-regulated stablecoin, what does this mean for Binance?

SAFU funds will lose value in exchange for security

In July 2018, Binance launched the SAFU and financed it by committing a small percentage of trading fees. On Jan. 29, 2022, the SAFU funds had reached $1 billion.

The fund’s dollar value has fluctuated amid crypto market conditions, waning during the bear market and reappearing above the $1 billion mark again in April 2024.

While denominating the fund in stablecoins will make it less susceptible to market swings, it also means that it will miss out on potential gains and be exposed to U.S. dollar inflation, as some market observers have noted.

Billionaire investor and Draper Associates founder Tim Draper told Cointelegraph that he thinks Binance’s decision to modify the fund is “short-sighted.”

He believes allocating 100% of a portfolio to a stablecoin pegged to the dollar is unwise, adding that he “doesn’t see government spending decreasing.”

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“Governments have little incentive to decrease spending when they are able to print money that people accept,” he said.

Bitcoin is widely considered a safe haven asset, similar to gold. Inflation, money printing and geopolitical instability are considered ideal conditions for BTC. According to Draper, the SAFU will decline as Bitcoin rises:

“The dollar continues to decline against Bitcoin, and I believe that decline will continue and accelerate over time.”

For others, missing out on potential gains may just be the price Binance has to pay for a secure fund.

Ruslan Lienkha, chief of markets at fintech and crypto exchange YouHodler, agrees with Draper that “in such a configuration, SAFU funds will lose value due to inflation, but we can consider it as a payment for safety.”

Lienkha told Cointelegraph that Binance could benefit from USDC’s fully centralized stablecoin setup, as it would be “less exposed to hacker attacks, stolen USDCs are much easier to find and block than decentralized Bitcoin.”

He said that the SAFU “doesn’t have any specific investment goals, as it is a kind of insurance in case of emergency.”

It could be possible that Binance prioritizes security over long-term valuation, but is Binance deciding freely or following orders?

Binance may have its hands tied

Binance may not have made the sudden exchange of SAFU funds to USDC voluntarily.

Binance declined to answer Cointelegraph’s question about the precise motivations behind its decision. However, Binance’s recent history with U.S. regulatory authorities may be an important factor in adopting USDC for the SAFU.

Grant Gulovsen, a U.S. lawyer who works with crypto clients, told Cointelegraph, “Binance had agreed to monitoring by the U.S. Treasury as part of their settlement late last year, so this certainly could be related to that.”

In 2023, the Commodity Futures Trading Commission (CFTC) sued Binance for violating trading and derivatives rules.

Related: Here’s why CFTC suing Binance is a bigger deal than an SEC enforcement

The results forced Binance founder Changpeng Zhao to step down and settle a fine of $4.3 billion with U.S. authorities.

Another consequence of the case was an agreement with the United States Department of Justice (DOJ) to extensively monitor Binance operations.

Binance’s plea deal with the U.S. government also included five years of oversight by the Financial Crimes Enforcement Network (FinCEN), as detailed in an X post by former U.S. Securities and Exchange Commission official John Reed Stark:

Source: John Reed Stark

The change to USDC may be part of this new compliance agreement Binance has with U.S. authorities. 

Why did Binance pick USDC? The stablecoin is widely branded within the crypto community as the market’s most regulated and compliant stablecoin.

According to the compliance professional and board member of Crypto Valley Association, Ekaterina Anthony: “U.S. law enforcement have the same amount of power on both Tether, Circle and Paxos. They can ask any of them to stop serving certain entities if they desire to.”

However, she told Cointelegraph that “it might be a bit more difficult to go after non-U.S. residents than to go after U.S. residents — that means that the directors of Circle might be easier ‘to grab.’”

Binance’s USDC move highlights importance of compliance

The crypto market has matured rapidly from being considered a Wild West market to being acknowledged by institutional investors, exemplified by the approval of U.S.-based spot Bitcoin ETFs in January.

Indeed, many crypto market observers anticipate a massive injection of capital from institutional investors in the near future as they become more comfortable with digital assets.

But, institutional investors require more secure and regulated markets.

This has created competition among stablecoin issuers to create products that are compliant with emerging regulatory frameworks.

USDT has dominated the stablecoin sector, mainly because it established itself as a first mover. However, Tether has been shrouded by fear, uncertainty and doubt due to its opaque approach regarding the assets backing USDT.

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In contrast, USDC has branded itself as a highly regulated and compliant stablecoin since its launch in 2018. This has allowed USDC to take the lead in institutional adoption over Tether.

Circle has also applied as an authorized stablecoin issuer under the new European legal framework, the Markets in Crypto-Assets (MiCA) Regulation.

Binance has previously shifted the balance of SAFU funds to more regulated assets. In March 2023, it replaced the Binance (BUSD) in the fund with True USD (TUSD), reportedly in response to U.S. enforcement action against the former’s issuer, Paxos.

Binance’s move to adopt USDC may be highly induced by the oversight of the U.S. authorities. However, the exchange may be making a safe move, following the crypto industry’s trend of exhibiting regulatory compliance to attract the new wave of institutional investors.

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